Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Monday, August 2, 2010

Bob Murphy Takes on Krugman's History and Krugman's Curious Definition of Prosperity

Paul Krugman is fond of claiming that Herbert Hoover was a "liquidationist" (he was not) and that the Hoover administration responded to the downturn by having the Federal Reserve System raise interest rates and by cutting spending.

Bob Murphy, who in my view is a real economist (not a Keynesian), takes on the Krugman version of American economic history in this article, which I believe is worth reading. He not only debunks the Krugman-Robin Wells (Krugman's wife) thesis, but also anticipates the counter-criticisms.

However, I do wish to take on one element of his analysis, that being the definition of "prosperity" as being associated only with the rate of unemployment. Now, he only has the word in the title, but it is clear that he is saying that the rate of unemployment (or employment) is the key to prosperity.

I would like to argue that it is the other way around: a prosperous economy will provide employment opportunities. But there also is another point that Keynesians seem to forget: employment is a MEANS to an end, not an end in itself.

During the Cold War, I remember hearing a Marxist (card-carrying Marxist) "economist" claiming that Romania had a better economy than that of the USA because there was "no unemployment there." Now, he said this during the recession of 1982, when the rate of unemployment then was close to what it is today. Indeed, I remember hearing the critics claim (including men like John Kenneth Galbraith) that not only was the supposed "full employment" of the U.S.S.R. and its satellites "proof" of a "superior" economy, but THEY HAVE FREE MEDICAL CARE.

Now, what they did not point out was that the real standard of living for people in those countries was dismal, and medical care for the mundanes (those that were not part of the Communist Party ruling class) was pretty bad, to put it mildly. Furthermore, as James Bovard points out in this recent article, Romania, for all the lovefest showered upon it from different quarters, in reality was a most miserable place.

I bring up these points to note that full employment in itself is NOT an appropriate "goal" for an economy. Furthermore, I would say that "economies" do not have "goals." Instead, individuals have goals. An economy is a mechanism by which individuals produce and distribute things that help to meet their needs, in which individuals participate as part of their own means-ends frameworks.

The question we should ask is this: Why are there impediments to individuals being able to engage in those things which help us to meet our goals? If you are wondering why this is so, try starting your own business to make goods or provide services that others might want, and you will find that government provides a large number of barriers.

In some cases, such as delivering documents from one person to another, one might find that it is against the law, given the legal monopoly held by the U.S. Postal Service. Places like Cleveland, Ohio, which has been losing population for years, make it very difficult for entrepreneurs to get started, as Nick Gillespie notes in this recent article on the Reason website.

To the Keynesian, however, all of this is gibberish. An economy to them is nothing but a series of numbers to be stacked into GDP figures. In that view, assets are homogeneous and all that is needed is a little bit of inflation and -- Presto! -- we have an "economy."

There is a "great gulf fixed" between how Paul Krugman and I view an economy. Krugman despairs because the government is not spending enough money and the Fed is not printing enough to create high rates of inflation. I despair because the government is doing everything it can to destroy what still is relatively healthy in the economy in order to help its sick friends, like corn-based ethanol, "alternative" energy, and firms on Wall Street that are politically-connected.

10 comments:

Please elaborate on your idea of a "prosperous economy". Of course, it's subjective. What's the old saying? "If you've heard of someone losing his job, it's a sign of a possible down-turn. If a relative lost his job, it's a recession. If you lost your job, it's a depression. And if you couldn't land a new job just as good within 4 weeks, it must be a great depression."

So just to clarify, we are suppose to believe, based off this essay by Murphy, that Hoover DID NOT embrace austerity like Krugman claims, and the Fed DID NOT raise rates, like Krugman claims? Of course, anyone that looks at the very data Murphy provided would realize that Hoover did embrace austerity, and the Fed did raise rates. Oddly enough, Murphy’s own data proves Murphy’s own thesis wrong. I’ll explain.

Yes, Murphy’s chart shows Federal spending growing in the early 30’s. However, Krugman has argued spending grew too slow, and should have increased. So no, Hoover did not ‘slash spending’, but he certainly did not increase spending to the extent Keynesians were calling for. Now, the curious part of the Murphy piece is he claims fiscal policy tightened, and then he posts a chart of the deficit as a share of GDP that remained positive until 1930-1931, then only slightly fell negative until falling to only 4% of GDP in 1931-1932. Now I’m sure the first response by many will be ‘gee, 4% of GDP is a huge deficit’. Well, that depends. It’s irrelevant to look at that 4% number alone. It needs to be looked at the in context of the fall in output, and, we can all agree, output dropped massively during this time period. So in order to keep the deficit from growing even larger, what did Hoover do? He massively raised taxes. Remember, there’s two ways to cut the deficit: cut spending and raise taxes. So while Hoover did not exactly ‘slash’ spending, he did massively raise taxes, a fact provided by Murphy via a link in this essay. Now, last time I checked, I think it was commonly agreed upon that tax increases = austerity. So, when Krugman refers to the lack of spending under Hoover, it was the lack of deficit spending under Hoover that he is referring to. As Murphy’s own data shows, deficit spending was essentially non-existant during this time period. So yes, spending was not slashed, but deficit spending very clearly was, according to Murphy’s own data.

Now, Murphy claims the Fed did not raise rates during the early 30’s. Huh? Murphy’s own chart shows the Fed raising rates from 1.5% to 3.5% in 1931. This is a massive tightening of monetary policy.

It’s pretty clear, by the data supplied by Murphy, that Hoover, did, indeed, run deficits that were too small given the downturn in GDP (Hoover slashed deficit spending)) and the Fed, very, very clearly raised rates in 1931. Murphy’s claim that Krugman is re-writing history is false.

Of course, if Murphy was a ‘real’ economist as the Prof. claims, then Murphy would have written about the true cause of the Great Depression: the public surpluses of the 20’s, which Murphy conveniently provides (and ignores) in his data.

Historical fact: every significant downturn (depression) in the US was preceded by the federal government running a surplus.

Since your entire program appears based upon the dubious claim that prosperity is based upon GOVERNMENT deficits, why not start from the beginning and attempt to prove that to us point by point from a micro-human level and include citations to your data/arguments etc...

You should read Krugman's article about Galbraith. Clearly you don't know that Krugman himself has written extensively on liberal overreach, and how men like galbraith are convinced of exactly what you accuse Krumgan of.

Krugman spends time refuting that which you claim he defends. Look it up on pkarchive.org

Anyone who says that Krugman's trade theories are semi-discombobulated without backing it up is a joke. You still wont tell me how they are. Maybe this is why Krugman, the most-celebrated economist of his generation and a brilliant professor at Princeton, won the Nobel Prize. Who are you to say that he is not an economist. I look forward to hearing you explain how the New Trade Theory and the New Economic Geography are semi-discombobulated. You clearly just hate Krugman for being a liberal as evidenced by you making this unfounded claims.

Krugman despairs because the government is not spending enough money and the Fed is not printing enough to create high rates of inflation. I despair because the government is doing everything it can to destroy what still is relatively healthy in the economy in order to help its sick friends, like corn-based ethanol, "alternative" energy, and firms on Wall Street that are politically-connected.

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).